A quiet night of trade at the start of the week withJapan on holiday as currency markets continued to
digest the positive US payroll number on Friday which has
reduced the chances of a Fed rate cut in Q1 of 2007 to virtually nil. The payroll numbers which expanded at
167K versus 125K forecast combined with the fact that wages gained at the
fastest pace since 2000, have put the ball firmly in dollar long’s court at the
start of the week. It is now euro bulls who must prove their case to the market.
The greenback goldilocks scenario of steady, moderate labor market growth
offsetting any depressive effects of the collapse of the US housing sector appears to be unfolding as 2007
begins and for now the talk of a serious slowdown in the US economy has been stifled by latest positive
US economic
data.
Meanwhile, in Euro-zone the economic
picture was rather mixed. German Factory Orders printed in line with
expectations rising 1.5% on a month over
month basis
and 6.1% on a year over year comparison. While the producers in Euro-zone’s
biggest economy continue to
propel growth forward, German
consumers are providing no support
to the expansion. German Retail
sales disappointed once again registering a loss of -0.3% versus expectations of
a 1.0% gain. This was the third consecutive monthly contraction dashing analysts
hopes that the pick up in production along with an improving labor market in the
Euro-zone would translate into better consumer spending in the near term. The
lackluster retail results do not bode well for the continuation of an aggressive
tightening policy from the ECB. Despite the central banks hawkish bias, if the
EZ consumers continue to retrench,
monetary officials will have to carefully consider the policy implications of an
additional rate hike in February for fear of triggering a possible slowdown in
what is still a very fragile economic recovery. Thus for the time being, euro’s primary support is driven by technical
rather than fundamental
considerations as traders flock to the 1.3000 level as a zone of value. However,
if the EZ consumer does not loosen his purse string anytime soon, the EZ growth
story and along with it EUR/USD strength may well begin to dissipate.
